Smart Contracts Part 1 - What are Online Contracts?

Posted by: ico-check
November 26, 2018
Introduction to Online Contracts
Technology is constantly improving people’s quality of life. It has crossed geographical limits by transporting information quicker than ever before. Electronic commerce has made its way to the free market making it easier to make various business transactions associated with buying and selling of goods, services, and information over computerized networks.

With the steady development of e-commerce, comes the concept of e-contracts. Unfortunately, e-contracts still face a lot of challenges despite the quick evaluation it performs in the field of e-commerce.

What is a Contract?

In a nutshell, a contract is an agreement that has to be enforced by law. It is a legally binding arrangement among two or more parties who intend to produce a constitutional relationship. One party creates the proposition while the other agrees to the proposition making it irrevocable. The acknowledgement has to be definitive, not ambiguous and must be from any forms of disproportionate pressure or distortion. The item under the contract must be considered lawful. Contracts must be made in writing and have to be signed by both parties. This ensures that the agreement is legally binding and enforceable by law.

What are Online Contracts?

Online contracts have been brought about by the advancements of the internet and electronic commerce. An online contract is an arrangement shaped, autographed and processed electronically over the internet. In concept, online contracts are comparable to the time-honored paper-based contract. 

Both paper and online contracts are prepared in the same manner. However, unlike regular contracts, the buyer using an online contract only has to click on “I Agree" or "Click to Agree" buttons in the dialog box to expedite the agreement with the seller. In other cases, online contracts can also be signed electronically. 

There are different methods of making electronic signatures such as typing the name of the signatory on the designated space, copy pasting the scanned signature of the signatory or clicking an option determined for this function. After the conditions are met and verified, the payment is finished and the sale is concluded. 

Computer servers make these business transactions possible. Online contracts are developed to facilitate formulation and implementation of policies in commercial contracts over the internet. These online contracts are shaped for the exchange of goods and services between consumers and business establishments.

Online contracts can be broken down into three primary categories namely: web wrap contracts, shrink wrap contracts, and click wrap contracts. 

Different modes of online contracts include: employment contracts, consultant agreements, contractor agreements, non-disclosure agreements, licensing agreements, software development agreements, and source code escrow agreements. Although these kinds of contracts are very common nowadays, most people are not mindful about the legal complications the contracts are associated with. 

Types of Online Contracts

  • Shrink-wrap agreements are commonly the licensed agreements pertinent in purchasing software products. The terms and conditions to activate the software package are imposed to the customer who purchases it. These agreements are acknowledged by the user upon installation of the software program coming from a CD. Shrink-wrap agreements provide security to the manufacturer by protecting the product from any copyright or intellectual property infractions.
  • Click-wrap agreements are web based contracts which require approval of the user by clicking "I Agree", "I Accept" or "Ok" option in a dialog box. The user has to comply with the terms and conditions to be able to use the program in click-wrap agreements. Users are denied access or get their subscription cancelled if they do not comply with the terms and conditions of the program.
  • Browse-wrap agreements are designed to be binding with the daily users of a particular website. The users must comply with the policies of the website for continuous use. 

Elements of an Online Contract

  • Offer - Like any other contract, an offer has to be formed. The offer is the starting point of any contract. By selecting goods or services from the seller's website, the customer makes a proposition to buy. The offer can be withdrawn at any time ahead of its acceptance. Once the offer has been accepted, it becomes legally binding.
  • Acceptance - When the offer is approved by the other party, the offer becomes binding. Acceptance must always be definite and complete. It must be always conveyed to the other party. In cases of online contracts, communications can be made via e-mail or via requisition forms provided by the website.
  • Intention to create a legal relationship - a contract can be considered null and void if the intention to create a legal relationship is non-existent. To be enforceable by law, these contracts must be determined from the terms and conditions and encompassing ramifications. They will not be considered contracts, if they are not punishable by law.
  • A lawful object - A contract must be made for a lawful purpose. Any provisions of law cannot be circumvented and a contract must not be deceitful in nature. Anything illegal makes the contract null and void.
  • Consent - Consent means that both parties are in agreement. It is one of the most crucial elements of a contract. Consent is the consensus between both parties regarding the same object and the same manner. If consent is product of intimidation, the contract is voidable.
  • Performance - The policies of a contract have to be positive and clear as day. The proponent of the contract must be able to deliver the promises made as stated in the contract. If the contract is time sensitive, failure to meet the guaranteed outcome as stipulated, makes the contract void upon the choice of the affected party. 

Online Contract Formation

For a contract to be considered valid, it must be made with free consent of abled parties for a legal object and consideration. A contract must be expressed in words wherein the offer and acceptance is clearly stated and most of all accepted by both parties during the formation of the contract.

A few mechanisms are available in making electronic contracts like e-mails where offers and acceptances can be traded. Online contracts on the other hand can be established by filling out necessary information in a website form to avail of goods and services offered. Good examples are airline tickets. Goods can be dispatched by electronic methods like electronic tickets. Another common method of forming online contracts is through online acceptance by clicking the “I Agree” option in a dialogue box, e.g. when signing up for an e-mail account.

Online contracts are developed mainly over the internet and e-mail services. It still requires the elements of traditional paper based contracts such as offer and acceptance. 

Formation of contracts over the internet differs from the preparation of traditional contracts. Issues have been raised regarding the suitability of the rule of offer and acceptance. In most cases where the website acts as the retailer, the consumer has to agree with the terms of the website by clicking on a specific option button in order to purchase songs, movies, books, etc. After the customer agrees with the website’s terms and conditions, acceptance is expressed and it is the obligation of the website to dispatch the product to its customer. Upon payment, the contract of the website and customer will be concluded for the specific transaction.

Online Contract Validity

Browse-wrap agreements’ terms and conditions are mostly accepted by clicking the designated options in a dialogue box, while acknowledgement to shrink wrap contracts is given by the customer when unwrapping and utilizing the software product. People are notorious for not taking time to read the terms and conditions of these goods and services. People must desist from these habits because enforcement of these terms and conditions can and will be held against them.

Globalization has hastened the deployment of online contracts. These contracts can be encountered in everyday activities such as buying goods and ATM withdrawals. It is very evident that electronic contract technology brings convenience and cost effectiveness to both parties as it expedites business transactions way faster than the time-honored paper contract. Electronic contracts extremely reduced the chance of making errors through its automation. Moreover, it has given the seller the potential to gain many more customers regardless of geographic location without the need of brokers or middlemen. 

In a nutshell, online contracts are the communication between two or more parties made simpler in view of exchanging goods and services. 


Online contracts are developed to safeguard online transactions. These contracts are made to inspect scams in order to advocate trust in legitimate online transactions. Furthermore, online contracts aim to give a lawful quality to the idea of digital signatures. Lastly, in the concern of saving time and money, online contracts are leaps and bounds better than the time-honored medium of paper based contracts.